Can a landlord split property ownership to save tax?

A landlord should consider splitting property ownership or rental income with a partner.

There are potential income and capital gains tax benefits for landlords depending on a variety of factors which you need to carefully consider.

It can work well because it allows for both income tax allowances to be maximised from both parties to give an overall tax saving.

Additionally should you choose to sell a rental property at a higher price than it cost capital gains tax may be lowered by being able to use more than one capital gains tax allowance (AEA).

Legally splitting ownership of a property is different to only allocating some rental income to a partner.

Whenever you share ownership of a property with others everyone is considered to have an equal stake in that property for tax related matters but in some cases you can divide the rental income by different ratios to maximise the tax benefits for each partner.

Splitting rental income for tax purposes

Splitting property ownership so you can distribute rental income with your partner can be particularly beneficial if one party falls under a higher rate tax bracket while the other is on a non taxable or basic rate.

Married or civil partner splitting rental income:

When ownership of a property is split in general the expectation is that the rental income is shared equally.

The percentage share of rental income can potentially be altered by making a declaration to HMRC through the completion of HMRC form 17.

A form 17 election is exclusively available when the let property is owned by spouses or civil partners as tenants in common. This specific property ownership type means that each party individually owns a portion of the property (not necessarily 50:50).

In comparison if the property ownership falls under joint tenancy making a form 17 election isn’t feasible. Under joint tenancy both parties have equal ownership of all parts of the property meaning any rental income derived from it can only ever be equally divided on a 50:50 basis.

Unmarried partners splitting rental income:

Unmarried partners do not have to follow the same regulations as married couples and civil partners when it comes to rental profits from a buy to let property. This can allow for more flexibility in how these profits are taxed.

Typically the income is divided between joint owners based on their ownership percentages but in reality this may not always be the most advantageous option from a tax perspective.

If an alternative allocation would result in a lower combined tax bill the joint owners can mutually agree to divide the rental profits at a different ratio split.

No official election is necessary and unlike married couples and civil partners unmarried joint owners have the freedom to distribute income however they see fit. It’s important to note that for tax purposes the split must align with the agreed upon rental profit share.

What are the types of joint property ownership?

There are different types of ownership in England and Wales and you need to define yours before you can consider splitting ownership:

Sole ownership: 

A property is registered to one owner, in their name; income and capital gains are chargeable solely to that individual. Income and gains may not be shared for tax purposes with a spouse or civil partner.

Joint ownership (joint tenants): 

A property is registered to multiple owners; if one joint owner dies, the property automatically cedes to the remaining owners.

Interest in a jointly owned property may not be bequeathed in a will before the last surviving joint owner becomes the sole owner.

Each individual is entitled to an equal share of the income and capital gains; no election may be made for a disparate split of the income.

When two or more people buy a property in joint names, with friends for example, ensure that you have common ownership as tenants or tenants in common.

Common ownership (tenants in common): 

This is where an individual owns a proportion of a property. This may be equally split or the proportion belonging to each owner may vary.

If a tenant dies, then their share goes to their estate and is handled by the will or according to intestacy rules.

If the individuals own the property in different proportions and they are not married or in a civil partnership, income and gains from the property are divided in proportion to ownership.

In the case of married couples and civil partners, property income is shared equally unless both parties declare a difference in the income split, based on beneficial ownership. The gain would follow the beneficial ownership.

How to save Capital Gains Tax by splitting ownership

The beneficial owner of a property is the person normally chargeable for capital gains tax purposes.

Making use of the capital gains tax allowance is important because it lets you make a gain up to the threshold tax free.

The capital gains tax allowance or annual exempt amount is set at £6000 per person per tax year to be reduced to £3000 per year from the 24/25 tax year.

If a rental property has only one beneficial owner then they will be the only one liable to capital gains tax.

Where ownership of a rental property is changed to become jointly owned then married couples and civil partners can split the asset ownership for capital gains purposes.

It’s crucial to understand that if your jointly owned asset is sold profitably your profit share may be subject to capital gains tax.

How much each owner gets from this gain depends on their beneficial ownership percentages.

The capital gain is determined by deducting the cost of acquiring and buying the property, any qualifying improvements and other allowable costs from its final selling price.

A simple CGT for rental property example:

One person in a marriage or civil partnership owns a property as the beneficial owner. The other person in this relationship does not and hasn’t used their capital gains exemption for that tax year.

Therefore the couple would be at a financial advantage if they transfer the property into joint ownership before they sell it.

How do I transfer beneficial ownership?

Couples who are married or civil partners typically use a deed of assignment as a means to transfer their beneficial interest from one partner to the other.

If you and your spouse own the property as tenants in common you can proceed with drafting and signing the deed when you are ready.

If you both own it as joint tenants it will be necessary for you to first obtain a severance of joint tenancy before being able to use a deed of assignment.

The amount of beneficial ownership that can be assigned is flexible and can be divided according to your preference.

A form 17 should be completed along with a deed of assignment if the beneficial ownership split is not equal.

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